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Government versus venture capitalists

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Rowland’s report concluded that each year, 5,000 of the 25,000 to 32,000 small to medium-sized businesses in the UK would need external finance to grow – but would experience significant problems in accessing capital from £2 to 10m, as the economy emerges from recession.

Rowlands, and his team, concluded that the now permanent equity gap for companies seeking to raise between £2m to £10m is down to structural market failures, market issues that affect supply of growth capital, and the impact of the recent financial crisis and recession.

Following this, the government proposed a new £500m Growth Capital Fund for private capital to invest in established and growing SMEs. But this isn’t what upset the VC community. What has is that this finance should consist primarily of mezzanine finance, which is a fusion of debt and equity, rather than venture capital, and therefore omits opportunities for venture capitalists. Furthermore, this finance, or public funding, should be accessed only from government.

Is it right to ignore the venture capitalists?

According to the Association of Investment Companies’ acting director-general, Ian Sayers, said: “the danger is that the novelty (of the £500m Growth Capital Fund) is favoured at the expense of existing mechanisms, such as Venture Capital Trusts (VCTs), which have built-in advantages when it comes to quickly channelling funds to support smaller UK business.

 “VCTs are an established network with a track record of meeting companies’ funding needs. It will take years to establish an alternative with the same reach and expertise,” Sayers continues.

Chris Allner, head of private equity at Octopus Investments, said: “Venture Capital Trusts such as Octopus Titan VCT have a proven record in attracting private capital to invest in SMEs, as they play an extremely important role in supporting entrepreneurs by funding their high growth businesses.

“The danger to the economy will be that the time this money (the £500m public funding) is most needed by small companies, but is still unavailable, will be in 2010, in the turmoil of election year. A better route could be to promote existing venture firms and encourage increase in scale – this way companies which can provide for future growth and employment, can be identified more quickly and supported. Thus, the doctrine of applying public-purpose funds is used effectively."

Association of Investment Companies’ Sayer concludes: “VCTs are a unique private/public partnership which draw upon private investors’ savings to create funds targeted on entrepreneurial, innovative companies. Without VCTs pooling these funds, these resources would lie completely untapped.”

If this fund claims to be just what the market and UK SMEs need to continue to boost overall economic growth, perhaps a combination of VC and public funding needs to be considered. Much to the chagrin of many SMEs, central government has yet to announce an update on the fund’s status; whether the full £500m has been raised by the banks or the expected date of its launch.

Until we actually see the promised funding reach those companies that need it, businesses will, wisely, reserve judgement.

Related articles:Is venture capital broken?How mean is your Venture Capitalist?

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